China's Economic Recovery Stumbles Amid Weak Factory Activity
Economic Activity Weakens in January
China's economic activity unexpectedly faltered at the start of 2025, raising concerns about the sustainability of its recovery. After three consecutive months of expansion, factory activity contracted in January, with the manufacturing purchasing managers' index (PMI) falling to 49.1, the lowest since August 2024. The non-manufacturing PMI for construction and services also declined to 50.2, barely above the 50-point mark separating growth from contraction.
Fiscal Support Falls Short
This economic slowdown comes after weak fiscal support from the government in 2024. Industrial firms reported a third consecutive year of profit declines as deflationary pressures persist, despite a consumer goods and machinery subsidy program that temporarily boosted earnings in late 2024.
Need for More Government Spending
The latest data highlights the need for the Chinese government to increase its fiscal spending and borrowing to stimulate demand and prevent further economic deceleration. "Without a more pro-growth stance, it will be difficult for China to avert a sharper economic slowdown in 2025," said Carlos Casanova, senior Asia economist at Union Bancaire Privee.
Trade Tensions and Property Sector Weakness
The urgency is heightened by the threat of tariffs on Chinese exports by the Trump administration, which could weaken overseas demand at a time when domestic consumers and private firms are already cautious. Meanwhile, the embattled property sector shows no signs of a sustained rebound.
Central Bank Prioritizes Currency Stability
Despite the slowdown, the central bank has prioritized stabilizing the yuan over monetary easing, suggesting a possible moderation of concerns about growth. President Xi Jinping has vowed to strengthen economic recovery and deepen reforms, but economists remain skeptical about the boldness of Beijing's actions to end deflation.
Outlook Remains Uncertain
The PMI data released by the National Bureau of Statistics provides the first official insights into China's economic health in 2025. Economists warn that the economy is far from recovering and that stronger fiscal policy measures and a cut to the reserve requirement ratio for banks may still be needed.
Exports and Fiscal Spending
Production and new orders fell to five-month lows in January. New export orders dropped to their lowest since February 2024, indicating weak global demand. Despite the approaching Lunar New Year holiday, analysts suggest that factory activity may have slowed more than usual due to less-than-expected export benefits from front-loading of orders. Fiscal support from local governments remains constrained by declining land sales revenue and tax income. The Finance Ministry's pledge to increase spending in 2025 will require substantial financial backing to ensure that governments have the resources to follow through.